Arbitration Agreements Remain Valid Regardless of Unpaid Advance on Costs

November 10, 2023by Jose Joseph0

Arbitration court-Representational AI image

 

An arbitration agreement remains valid, regardless of whether either party fails to pay the arbitration fee. 

National and state courts will not have jurisdiction to entertain claims arising from contracts that contain an embedded arbitration clause.

Non-payment of arbitration costs no longer leads to the dismissal of a case or waiver of the arbitration clause.

Arbitration is a widely recognized method for resolving disputes in the United Arab Emirates, offering an efficient and confidential alternative to traditional litigation. However, the issue of whether non-payment of arbitration costs can impact the validity of an arbitration agreement has been a long-standing concern. In a recent landmark decision, the Court of Cassation in Dubai (Court) in Decision No. 10 of 2023, (Judgment), has brought clarity to this matter, ruling that an arbitration agreement remains valid, regardless of whether either party fails to pay the arbitration fee. This Judgment has significant implications for the arbitration landscape in the UAE. 

Before delving into the issues, a brief introduction of arbitration costs will give the reader a better understanding of the Judgment. 

Advance on cost in Arbitration matters 

An advance on costs is a payment that both parties are equally responsible for, and it is intended to cover the expenses associated with the arbitrators and the administrative costs of the arbitration institution. The arbitrators depend on this advance on costs to cover their fees. Most major arbitration institutions mandate that the parties pay their respective portions of the arbitration fee before the dispute-resolution process commences.

In the current arbitration landscape, the respondent may opt not to fulfill their obligation to pay their share of the advance on costs as a litigation strategy. Respondents may employ this non-payment of the advance on costs to dissuade the claimant from pursuing their claim. Consequently, the claimant may find themself with no alternative but to cover the advance on costs for both the respondent and themselves. These advance on costs and any other expenses incurred by the claimant during the arbitration process can be sought as a refund from the respondent or included as an additional relief within the award.  

Background and Decision 

The case that led to this pivotal decision had its roots in a dispute brought before the Dubai International Arbitration Centre (DIAC). The claimant invoked the arbitration clause for dispute resolution, prompting DIAC to request both parties to share the arbitration costs. However, the respondent refused to contribute its share of the arbitration costs. In response, the claimant also declined to pay the respondent’s portion of the arbitration fee, leading DIAC to close the arbitration case due to non-payment of the associated costs. 

After the DIAC concluded the arbitration case, the claimant pursued the matter in Dubai Courts. The respondent argued for the dismissal of the case, citing the presence of the arbitration clause, whereas the claimant contended that the respondent’s failure to pay the advance costs should be considered as an abandonment of the arbitration agreement. While examining the case’s facts, the Court also reviewed its prior ruling in which it had stated that the non-payment of advance costs by the respondent constituted a waiver of the arbitration agreement. However, in the Judgment, the Court overturned its previous decision and affirmed that the arbitration agreement remains in force, regardless of whether or not the parties fulfil their obligation to pay the advance costs. 

In rendering this decision, the Court scrutinized Article 45(1) and Article 54(4) of the Arbitration Law. Article 45(1) stipulates that arbitration procedures conclude with the issuance of the final award by the Arbitral Tribunal, while Article 54(4) explicitly states that the arbitration agreement remains effective in accordance with the provisions of the Arbitration Law even after the nullification of the arbitral award, except in cases where the agreement itself is deemed non-existent, forfeited, or null and void, or incapable of being executed. 

After a comprehensive analysis of these two articles, the Court reached a significant verdict. It clarified that an arbitration agreement will continue to be valid and enforceable even after the nullification of the arbitration award, unless such nullification is due to the mutual consent of the parties or the agreement’s impossibility of execution, forfeiture of its term, or nullity. As long as the arbitration agreement remains valid, national and state courts will not have jurisdiction to entertain claims arising from contracts that contain an embedded arbitration clause. The Court also clarified that non-payment of arbitration costs does not result in waiving the arbitration agreement, thus entitling either party to resubmit the claim with the DIAC.  

Implications 

In light of this judgment, it is now clear that an arbitration agreement remains in force until the dispute is resolved. Non-payment of arbitration costs no longer leads to the dismissal of a case or waiver of the arbitration agreement. Both parties can again invoke the arbitration agreement, provided it is valid. This decision significantly enhances the effectiveness and enforceability of arbitration agreements in the UAE, reinforcing the country’s commitment to alternative dispute resolution mechanisms.

About ATB Legal

ATB Legal is a full-service legal consultancy in the UAE providing services in dispute resolution (DIFC Courts, ADGM Courts, mainland litigation management and Arbitrations), corporate and commercial matters, IP, business set up and UAE taxation. We also have a personal law department providing advice on marriage, divorce and wills & estate planning for expats. Please feel free to reach out to us at office@atblegal.com for a non-obligatory initial consultation.

by Jose Joseph

Jose is a Senior Associate at ATB Legal. As a legal consultant he handles and extensively writes about Arbitrations in DIAC & ICC, DIFC and ADGM matters, corporate and commercial litigations, and trademark.

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